With these changes come a degree of uncertainty, and free financial advice on pensions post retirement has now taken on a whole new complexion, we only need to take a look at Australia where similar pension freedom rules were introduced around 1995 with almost 40% running out of money before aged 75. (telegraph.co.uk, Katie Morley 03/05/2015). Many believe that individuals were running up debt before the access age of 55 in the knowledge that their lump sum would pay it off, but in effect not taking into account the reduction in fund value.
Are we going to make the same mistakes as our Australian Counterparts?
Can we learn from this?
Part of the legislative shake up that we have seen in the UK have included a change away from commissions to fees, meaning that advisers needs to demonstrate to clients that they are earning the ongoing monies. Part of which is an annual review both pre and post pension access. This serves to help clients regularly take snap shots of their ever changing situation, also (as the funds in a draw down are still invested) an annual attitude to risk review to assess whether and changes need to be made. In addition to this the advisor will also look at changes in the law, tax allowances etc to help moving forward. Also its extremely important to maximise the value of the fund by taking money in the most tax efficient way – Ie taking as much tax free as possible – Your adviser can help with this strategy for the upcoming year.
Is Drawdown my best option?
Drawdown is only one of a number of options for accessing your pension. You can also make use of tax free lump sum (typically 25% of the value of the fund – contrary to popular belief this is not always advisable to take in full), purchase an annuity (an income for life) or stay invested – Or a combination of any of the three. This is an important decision and may be irreversible – As this is going to affect the remainder of your life you should seek financial advice top ensure you fully understand the implications and risks involved in each alternative.
Fees and charges
As you would expect there will be a cost involved, generally there will be an initial cost for the work involved – You may find that the first consultation is free of charge, however the costs of this will be included in the initial fee should you wish to proceed.
ITS IS IMPORTANT TO ASK IF FEES ARE PAYABLE SHOULD YOU NOT PROCEED AS THIS WILL BE DIFFEERENT FROM COMPANY TO COMPANY.
This fee would cover the fact find, attitude to risk assessment, research and analysis of existing plans which would be requested by the adviser (should include past performance, fees and charges, asset allocation (how the fund is invested) and whether or not this is in line with your current attitude to risk, what guarantees or benefits are offered (if any) on existing plans, and penalties or exit charges among other areas)
Many people are unaware that their current plan can only be used to accumulate/build the funds and as such it isn’t “retirement ready” – Meaning that the fund CANT actually be accessed to release the monies need in retirement. This means at some point in the future the funds will need to be transferred out into a product that can be used for this retirement income. The question then is should you leave the fund until you are ready to retire, or is it more beneficial to transfer out into something more in line with you needs now.
What happens if I die after I have started taking income from my fund?
Unlike annuities which don’t usually pay benefits on death (unless extra guarantees have been selected and paid for), with drawdown you can select beneficiaries (not just spouse – could be anyone) to receive the fund upon your death. If this were to happen before you reach 75 the nominated beneficiary can receive free of tax – as a lump sum or as an income. IF your death is post age 75 the money will be taxed at the beneficiaries’ marginal rate – Just like any other income.